Efficiency versus innovation

Efficiency is about allocating existing resources. Innovation is fundamental to expanding production possibilities. National government initiatives to deliver services more efficiently by bypassing state governments may remove an important source of innovation.

A good deal of the policy debate in Australia recently has been about the capacity of the Australian national government to deliver policy outcomes at the local level. The problems afflicting the home insulation programme have been emblematic of some of the shortcomings of the national government when it comes to service delivery.

Education is increasingly seen as a national policy responsibility and, this week, minister Julia Gillard moved us closer to a national syllabus as she also unveiled a way to track students as they move around Australia.

Health care featured prominently in the last election with Kevin Rudd threatening to take responsibility for hospitals from the states if they did not move fast enough in the direction he was keen to set. However, even Labor state premiers have been opposed to transferring hospital operating responsibility to the national government because they fear that the national government is not well enough equipped to deliver better outcomes.

Since the end of the Second World War, Australian political leaders have been bemoaning the mismatch between their responsibilities and their taxation powers under the Australian constitution.

States started off with primary responsibility for service delivery but the national government ended up with access to the most efficient and broadly based taxes. This disparity in powers has led to Canberra progressively asserting greater control over service delivery as successive governments have been tempted to use their fiscal muscle to influence policy outcomes. Sometimes, this has been out of a genuine desire to effect improvement. Sometimes, it has been out of a genuine desire to improve their electability.

On the side, business groups have been influential, persuading governments that having to cope with differing rules between Sydney and Melbourne imposed an unnecessary cost. Just as companies operated nationally so should government.

Policy economists at the national level also played a role. They have long decried the irrationality of state borders and have sought to apply microeconomic reforms nationwide when new policy prescriptions were being developed.

Pursuit of borderless efficiency neglects how good policy often evolves. The ideas of the minister for education are themselves an illustration of the importance of dynamic competition in policy development. Gillard is on record as saying how she has been influenced by educational innovation within the New York public school system. She has apparently visited New York officials on several occasions to gain an insight into the sources of their success and the direction of potential policies in Australia.

Luckily, the New York education authority did have the capacity to trial innovative programs which, if successful, could be applied by others. Ironically, implementation of national policies in Australia might stifle the sort of experiment that the New York school system was able to undertake.

The U.S. government is currently going through the trauma of reforming its health care system. It has learned from the experiences of the UK, Canada and Australia in framing its responses to rising costs and inadequate personal insurance cover.

Policy evolves best where ideas are tested, bad ones discarded and workable ones more widely adopted. The fewer opportunities for experimentation, the fewer opportunities there will be for successful policy innovation.

Also, governments might just get it wrong. The home insulation program is one example of a government overreaching. Last week, executives at Cisco Systems foreshadowed an announcement that, they claimed, will forever change the internet. Allowing for some exaggeration, this could put at risk the value of a national broadband network if it leaves the country inflexibly committed to a system that is efficient from an engineering standpoint but incapable of responding to the likely flow of future technical innovations driven by companies engaged in a dynamic competitive environment.

In the Australian context, freedom to innovate within states would ensure that those states delivering services most effectively would be copied and that laggards will have a role model to follow to help them improve.

Despite business advocacy of efficiency, the best businesses are the ones most adept at coping with change. Innovation leading to new products or responding quickly to the innovation of others is at the heart of successful business.

Businessmen do not much like the idea of dynamic competition driving their fortunes but governments have long recognized that exposing business to international competitive forces makes it more resilient and improves national economic performance.

Similarly, the process of dynamic innovation can improve the quality of our state governments. Rather than stifling their roles by imposing nationwide solutions, thought should be given to how they can be encouraged to innovate and set new, higher standards for others to follow.

Nationwide adoption of the current best idea has merit but leaves us with less flexibility to respond to change and, without the policy laboratory in which experiments can occur, takes away a source of future policy innovation.

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